Why it’s Impossible to Get Out of Debt

Did you know that money isn’t real anymore? In the good old days gold and silver were used as money, but soon it was too burdensome to carry large amounts of gold and silver coins around.

The U.S. Federal Reserve began to exchange bank notes for the precious metal coins. So for a $10 coin, a $10 bank note, that could be converted back to gold coins was exchanged and the gold was held in the bank vault. At some point banks petitioned government to allow fractional banking. Fractional banking allowed banks to pass out $100 dollars of notes for every $10 coin that they held in their vaults.

But wait: why (and how) would a bank ever give out more money than they take in? By offering interest bearing loans of course! [This is the exact moment that money ceased to be real]. So what’s the problem, obviously now more people could buy things with the borrowed money and that would stimulate the economy and that’s good right?

Let’s pretend we are still back at that very first fractional bank that has one person’s $10 gold coin in their vault. One person has a $10 reserve note that they exchanged for the coin and 9 other people have $10 reserve notes that they borrowed from the bank. Let’s allow a year to pass. So now the 9 people all owe $11 dollars (10 + 1 interest) [as a side note you can see why banking is such a great business, since they just made a 9 dollar return from someone else's original 10 dollars]. And they all have been very good citizens and they didn’t waste the $10 and they want to go and pay the loan and off.

But where will they get the extra dollar each? They would have to borrow it from the guy who had the $10 coin, since he has the only other $10 in circulation. Of course, he will want to charge interest. So if he lends the 9 dollars and the nine people all pay off the fractional bank, they still owe him the principle and interest on the loans that they took to pay their interest. How can this interest ever be repaid? The bottom line is that it can’t.

So we have a monetary system in which it is impossible for all the participants to be debt free. Here is the result of this system:

“…if all the gold held by the U.S. government (261.7 million ounces) was again required to back the circulating U.S. currency ($733,170,953,704), gold would need to be valued at $2,800/ounce.” Quoted from here.

The actual current system is just like this, only take away the $10 that is actually backed by gold. The bottom line is that the current monetary policy depends on ever expanding debt. There are many results of this system: inflation and polarization of the distribution of wealth.

Comments

Excellent article. There’s no question: consumer debt is an epidemic, sponsored by our governments. While leverage, as described by one of your earlier posts, is an effective investment tool, it can prove dangerous when used incorrectly. Banking has used the 10/100 leverage to effectively enslave it’s clients. Debt reminds me of the old days of indentured servants. A laborer could eventually “buy” their freedom after a number of years. I suspect that if you were to interview an indentured servant from 200 years ago and a person bogged down by credit card debt from today, the interviews would be very similar. Consumer debt is voluntary indentured servitude. Whereas historically only a small percentage of the population were indentured servants, nowadays the majority are enslaved, to different degrees. Our appetites have brought us into bondage. Great site, keep up the articles, I check it every day. Best of luck in you endeavors, Bryan Richmond

Great explanation. I think it will be less than 200 years before things snap. I saw a news article today about the current account trade deficit in the US being the highest ever at $195.1B. The rest of the world seems content to let America import the world’s products and continue buying US Treasury notes to finance the low interest rates and consumer spending that continues to drive people and the country further into debt. Its unsustainable but it continues go on. The best analogy I can think of it’s like getting closer to the edge of a cliff until you actually fall off it. The problem is what happens after you fall.